OREANDA-NEWS. S&P Global Ratings raised to 'B+' from 'B' its long-term corporate credit rating on TigerLuxOne S. a.r. l. (TeamViewer), a remote access software and online meeting software provider, wholly owned by private equity firm Permira. The outlook is stable.

At the same time, we assigned our 'B+' corporate credit rating to TeamViewer's fully owned financing subsidiary Regit Eins GmbH.

In addition, we raised to 'B+' from 'B' our issue rating on the company's €390 million-equivalent first-lien senior secured term loan, including a $320 million tranche and a revolving credit facility (RCF) of the equivalent of about €31 million (or $35 million). The recovery rating on these debt instruments is '3', indicating our expectation of meaningful recovery in the event of a payment default in the higher half of the 50%-70% range.

We also raised to 'B-' from 'CCC+' the issue rating on the €115 million-equivalent second-lien senior secured term loan ($125 million). The recovery rating remains at '6', indicating our expectation of negligible recovery (0%-10%).

The upgrade primarily reflects TeamViewer's stronger-than-expected billings growth and free operating cash flow (FOCF) generation in 2015. We also factor in our forecast that the company's credit metrics and FOCF will continue to improve in 2016 and 2017, primarily thanks to continued solid demand prospects for remote support software. Furthermore, the upgrade reflects the company's very high profitability and cash conversion--with reported cash-based EBITDA margins of about 60% in 2015--relative to its rated peers.

In 2015, TeamViewer reported 19% billings growth and an increase in operating cash flow of 18% year on year. As a result, S&P Global Ratings' adjusted cash flow from operations (CFO)-to-debt ratio improved to nearly 8% in 2015 from 4% in 2014. In our base case, we forecast billings growth of more than 20% year on year and a further increase of the adjusted CFO to debt to about 12% in 2016.

Despite these strengths, our view of TeamViewer's financial risk profile remains unchanged, primarily because we think that the company's owners are likely to pursue an aggressive financial policy. As a result, we don't forecast a sustainable deleveraging in the medium term. This is partly offset, however, by TeamViewer's high cash conversion of profits, good cost control, and low capital and working capital intensity, which would facilitate relatively quick deleveraging if the company were to use excess cash for debt reduction.

Our assessment of TeamViewer's business risk profile continues to mainly reflect the company's small size and its very narrow product focus on remote access software and online meeting software, which we view as non-mission-critical for clients. In addition, we think that the business risk profile is constrained by customers' low switching costs and the industry's low barriers to entry. Also, the company competes with much larger, more diversified, and financially stronger software companies.

These constraints are offset in part by the company's:Sound competitive position in its niche market;Wide diversity in its client base with its focus on small and midsize enterprises; andRelatively high profitability of about 60% on a cash EBITDA basis. In addition, the company benefits from favorable industry trends leading to an increased need for remote access and support software, such as working away from the office and more automated remote support from help desks, all of which provide TeamViewer with marked growth potential, in turn further supporting its business risk profile.

Under our base case, we assume:Continued billing growth of about 20%-25% in 2016 and 15%-20% in 2017, driven by new license sales and update sales from its very large existing customer base, underpinned by favorable industry trends. Following the small reduction of adjusted cash EBITDA margin due to the company's strategy to increase its sales force, margins will remain stable at slightly below 60% in 2016 and beyond, due to limited customer acquisition costs and a highly optimized cost structure. Slightly higher capital expenditures of about €4.0 million-€4.5 million annually, which are relatively low, however, on an industry comparison. Moderate debt prepayment with excess cash flow in 2016.

Based on these assumptions, we arrive at the following credit measures: Debt to EBITDA of about 4.0x in fiscal 2016, adjusted for operating leases and based on cash-based EBITDA, down from 4.8x in 2015, mainly due to an improvement in EBITDA and moderate debt prepayments. CFO to debt above 10.0% in 2016 and 2017, compared with 7.9% in 2015.High EBITDA cash interest coverage of more than 3.0x in fiscal 2016, increasing to about 4.5x in 2017.

The stable outlook reflects our forecast that TeamViewer will have annual billings growth of more than 15% in 2016 and 2017, reported cash EBITDA margins between 55%-60%, and a sustainable improvement of S&P Global Ratings' adjusted CFO-to-debt ratio to more than 10%.

We would lower the rating if TeamViewer:Experienced significantly higher competitive pressure leading to a material decline in new billings or weakened cash generation, causing CFO to debt to fall below 10%.Pursued sizable shareholder returns that led to a leverage ratio sustainably above 4.5x; orHad an adjusted cash EBITDA margin that declined to below 40% as a result of intensified competition.

Rating upside currently seems unlikely, in our view, due to our expectations that the company's owners are likely to pursue an aggressive financial policy in the medium term. However, we could consider raising the rating if the company's CFO-to-debt ratio improved further to above 20%, coupled with gross debt reduction and a leverage ratio sustainably below 4x. We would also expect the company thereby to maintain its high cash EBITDA margin at about 60%.